Earnings Call Transcript - DHT Q1 2024

Laila Halvorsen, CFO

Thank you. Good morning and good afternoon, everyone. Welcome, and thank you for joining DHT Holdings' first quarter 2024 earnings call. I'm joined by DHT's President and CEO, Svein Moxnes Harfjeld. As usual, we will go through financials and some highlights before we open up for your questions. The link to the slide deck can be found on our website, dhtankers.com. Before we get started with today's call, I would like to make the following remarks. A replay of this conference call will be available at our website, dhtankers.com until May 22. In addition, our earnings press release will be available on our website and on the SEC EDGAR system, as an exhibit to our Form 6-K. As a reminder, on this conference call, we will discuss matters that are forward-looking in nature. These forward-looking statements are based on our current expectations about future events as detailed in our financial report. Actual results may differ materially from the expectations reflected in these forward-looking statements. We urge you to read our periodic reports available on our website and on the SEC EDGAR system, including the risk factors in these reports for more information regarding risks that we face. We will start the presentation with some financial highlights. We maintain a very strong balance sheet represented by low leverage and significant liquidity. At quarter end, financial leverage was 17.8% based on market values for the ships, and net debt was $13.5 million per vessel. The first quarter ended with total liquidity of $289 million, consisting of $73 million in cash and $216 million available under our revolving credit facilities. Now over to the P&L, we achieved revenues on TCE basis of $106.3 million, and EBITDA of $83.7 million. Net income came in at $47.1 million equal to $0.29 per share. We continue to show good cost control, and operating expenses for the quarter were $19.2 million, and G&A was $4.7 million. We are pleased with the result for the quarter and the vessels in the spot market achieved robust earnings, with $54,000 per day, and the vessels on time charters made $39,500 per day. The average TCE achieved for the quarter was $50,900 per day. And then over to the cash flow highlights. We started the first quarter with $74.7 million in cash, and we generated $83.7 million in EBITDA. Ordinary debt repayment and cash interest amounted to $15 million and $35.5 million was allocated to shareholders through a cash dividend, while $3.9 million was used for maintenance CapEx. We prepaid $24 million on the ING revolving credit facility, while $7.2 million was related to changes in working capital. And the quarter ended with $73 million in cash. Switching to capital allocation, DHT has a defined and predictable capital allocation policy and in line with our policy, we will pay $0.29 per share as a quarterly cash dividend, which is equal to 100% of ordinary net income. The dividend will be payable on May 31 to shareholders of record as of May 24. This marks the 57th consecutive quarterly cash dividend, and the shares will trade ex-dividend from May 23. On the left side of this slide, we present an update on estimated P&L and cash breakeven rates for 2024. P&L breakeven for the full year is estimated to $27,500 per day for the fleet, while cash breakeven is estimated to $18,300 per day, resulting in $9,200 per day per ship in discretionary cash flow after dividends. So assuming the vessels are in P&L breakeven, this means about $79 million in discretionary cash flow for the year. On the right side of the slide, we illustrate the quarterly cash dividend we have returned to shareholders since we updated the dividend policy in the second half of '22. This amounts to a total of $1.70 per share. And with that, I will turn the call over to Svein.

Svein Moxnes Harfjeld, CEO

Thank you, Laila. This slide compares DHT's spot market performance over the last 12 months with a quoted TD3c index. The TD3c index is the most prominent index representing the largest VLCC trade, namely loading in Saudi Arabia and discharging in China. The green lines and the numeric ledgers illustrate our spot earnings for each quarter in the period, and the orange lines show the index earnings. Several reports refer to the index when assessing the VLCC market. As one could clearly see from these numbers, the index is not an appropriate reference for DHT's spot earnings. The earnings power of the ship used in the index calculation is inferior to our average vessel, but this does not represent the whole delta. The other part reflects our customer base and related trading patterns, and what we actually get out of the market. The average delta during this period is about $15,000 a day. On this slide, we have an additional reference to DHT producing competitive spot earnings, and that is when compared to peers. The peer group consists of the usual suspects listed in the U.S., all with similar trading policies with respect to geographical areas and origin of oil. One of the four in the peer group is yet to report for the first quarter of this year. We illustrate quarterly spot earnings for each peer over the same period as the previous slide, and the numbers speak for themselves, with DHT coming out on top. And now to the outlook for the second quarter. As per usual, we provided our business updates on 10 days into the current quarter. The spot market softened a bit following our update but is now on a strengthening path again. Of the total estimated spot days for the second quarter, we have booked 72% at $51,000 per day. You should see this number in relation to the spot P&L breakeven for the second quarter being estimated at about $25,300 per day. As stated in the report, the freight market continues to show steady and reassuring conduct. The slumps in the market are grinding higher, with recent lows leveling out above $40,000 a day for an ECO vessel fitted with exhaust gas cleaning systems. We assess the current spot market for the three main routes on average to be in the mid-to-high 50s for DHT's average type-weighted fleet. U.S. Gulf to the Far East is currently a tad behind Arabian Gulf, South America, and West Africa, but is likely on the rise. The North Sea to Asia has been absent for close to two years but is now back in the market with a couple of cargos per month. We understand that VLCCs are gaining market share, now about 50% of seaborne crude oil transportation, underscoring end users increasing focus on cost per unit transported. This is in particular for the long-haul trades, but is also now a result of the Red Sea challenges, with parts of the AG to Mediterranean trade having moved from Suezmaxes to the VLCCs, sailing around the Cape of Good Hope. There's limited time charter activity for periods in excess of one year. However, we currently estimate the three-year time charter market for a good ship to be in the mid-$50,000 per day. And there is one client in the market now asking for bids on this. And there is a field of owners offering on this, although higher than our estimated markets. In sum, we are increasingly confident about what is ahead of us. The discussion of fleet development and demographics might be repetitive. We have here a presentation of the development with a somewhat different illustration. We have applied some key market observations and assumptions. One, over 90% of the ships now over 20 years of age are engaged in the southern markets. Two, this fleet's productivity is estimated to be some 50% of its nominal capacity. This is largely due to these ships rarely calling ports but often doing transshipments of cargos involving numerous ships and hence, delaying the delivery of cargo. And three, we assume ships will disappear from the shadow trade when they reach 25 years of age. As we had stated on numerous occasions, we expect the fleet to shrink over the coming years. The blue bars represent the fleet that has been or is below 20 years of age. This part of the fleet is employed in the compliant markets, and its size probably peaked in 2021 with some 768 ships. When applying our observations and assumptions, we estimate a sub-20 year old fleet to shrink to less than 730 ships by the end of 2027. As most of you well know, this happens at the time of growing oil demand and expanding transportation businesses. The ships in the shadow trades are serving a purpose in some markets, but with a significant haircut in productivity. We also take note that following the recent contracting of VLCCs, the activity has receded with apparently limited interest from ship owners in contracting large tankers now. We are being told that interest is being directed to other ship types and classes. The VLCC order book now stands at some 5% of the sailing fleet supporting our constructive market view. On that note, we will discuss our newbuilding projects. As announced, we have contracted four VLCCs, all for delivery in 2026. They are contracted at what we deem to be the top quality shipyards for large tankers. The ships will be of Super Eco-designs implying premium earnings power and related reduced emissions. These ships will have a new engine model that is different from what is being adapted to most of the other newbuilding orders that have been reported over the past few months. Further, our newbuilding orders are of larger carrying capacity both in deadweight and cubic terms, again, when compared to most of the other orders that have been placed. This is expected to offer better economics for both customers and DHT. For sake of clarity, we have no plan to declare options for additional vessels. Our next priority would be second on acquisitions should we be able to identify opportunities attractive to DHT. As stated, we do not intend to issue any new capital in relation to these newbuilding projects. And our financing plan consists of cash flow from operations, available liquidity, and new mortgage debt. With respect to new mortgage debt, our base case assumes about $60 million per vessel with a DHT style financing structure. And importantly, the strategy assumes that the dividend policy with 100% of ordinary net income shall remain in place. This last slide is familiar, so we will round up by saying that our markets are robust, providing good support and are steadily, albeit gradually, improving. Our team is doing a great job in getting the most out of what the markets have to offer, delivering premium earnings for our ships. Contracting on new ships seems to have receded, and supporting the highly constructive supply outlook. And we'll stick to our meeting with a focus on first-rate operations and related financial results in anticipation of increasingly rewarding times ahead. And with that, operator, over to you.

Frode Morkedal, Analyst

I had a question on the VLCC and the trading patterns. I feel like the smaller tankers, we all know have been benefiting from diversion around Africa and longer ton miles. But what do you see on the VLCC trade pattern? I think you mentioned briefly that VLCCs are taking Suezmax cargos. Maybe you can elaborate on that? And are you seeing any other changes?

Svein Moxnes Harfjeld, CEO

Yes, it relates to the Red Sea. Some Suezmax trades that typically passed through the Suez Canal into the Mediterranean are now being consolidated onto large ships, VLCCs, which are sailing around South Africa. Although this is a smaller segment of the market, it is increasing shipping distances. This is the main change in the current environment. There's also an emerging trade from the TMX project in Vancouver, Canada, where we expect a significant amount of crude oil to travel south for transshipments to VLCCs headed to Asia, particularly China. This expectation is partly based on the involvement of one of the major Chinese state-owned oil companies, which holds a quarter of the equity in the project and has been in discussions with us. Additionally, there is a general trend with more barrels coming from the Atlantic. Petrobras is ramping up production, and Guyana is expected to become more involved with VLCCs in the future. Meanwhile, the North Sea appears to be recovering, albeit with only a couple of cargos a month, but new incentives in Korea may encourage growth in that trade.

Frode Morkedal, Analyst

Okay. That's interesting. That's good color. On the newbuilds, you mentioned that they are Super Eco. Can you quantify the fuel consumption versus the existing fleet you have?

Svein Moxnes Harfjeld, CEO

I think the simple answer is no. So we know what it is, obviously, and we will be in detailed discussion with some of our key customers that are interested in these ships on those particular sort of features. But it is a marked improvement from the five ships that we have, that were all built in 2018, which is sort of the last class of these large vessel ships. So it's a marked improvement. So we're very excited about getting these assets into the water and seeing what they can deliver.

Frode Morkedal, Analyst

It will be interesting to know those facts when this arrives. Well, my last question is on, let's say, sentiment. I feel like in the stock market, at least, the investor sentiment has improved a lot recently, basically switching from let's say, cautious approach to basically reflecting the fair fundamentals as we see at least. But how do you see the sentiment among shipowners in the physical world so to speak? What's the mood right now?

Svein Moxnes Harfjeld, CEO

I believe that some traditional tanker owners have made investments in new ships and seem to be satisfied with those decisions. There is ongoing interest in medium-aged to older vessels on the product side, but I can't speak authoritatively on that market, so it’s best to consult those who specialize in it. The asking prices for modern large tankers are quite high, and there is interest from state-owned companies, particularly Bahri, which is the shipping arm of Saudi Aramco. This is a positive indicator since they are closely connected to a major state-owned oil company that plays a crucial role in the oil market. If they require more ships, it could reflect their expectations moving forward. They are particularly interested in modern secondhand vessels.

Omar Nokta, Analyst

I just wanted to ask about the VLCCs. You mentioned and we've seen that the market for new orders is kind of cooled from other shipowners. You decided not to exercise the call option. And I just wanted to ask just in terms of, I guess, perhaps maybe on sentiment, but maybe just in general big picture. Why do you think there's been a cooling in terms of new orders? And then also, has that cooling transitioned towards DHT or was the plan all along not to really exercise those options?

Svein Moxnes Harfjeld, CEO

Cooling has no direct connection to DHT. We make our decisions independently, and this is just a coincidental occurrence. There are a few other markets that might now seem appealing for various reasons, and this market isn't declining as much. I cannot provide all the specifics, but that appears to be the situation. Initially, there wasn't a significant number of owners eager to order ships for several reasons. They likely had different projects, ambitions, or priorities regarding capital allocation. LNG continues to attract much capital from the ship-owning sector, and as you know, those vessels cost at least twice as much as a VLCC. There are likely multiple factors at play. Additionally, deliveries are now at least three years away, pushing into 2027, which may discourage many. They would prefer earlier ship deliveries. That's why we were eager to finalize our deal quickly, as our first ship is less than two years from delivery. We found that appealing. So, it's likely a combination of different elements.

Omar Nokta, Analyst

Okay. That was very helpful.

Svein Moxnes Harfjeld, CEO

But just to add. So you know our decision is more that when you go to yard, you typically are offered options. And of course, you would like to have them. We've been, if we had a long-term project for several of these ships, then we will probably have gone ahead with one or several of them, but that is maybe not really stick in the short time. And this newbuilding project is north of $0.5 billion, so it's already a big commitment financially for the company. So to sort of double up on that, we think it would be too big a commitment at this point. Hence, the priority would be secondhand if we can find it. And there's a big if on that because it's not a given.

Omar Nokta, Analyst

Yes, it makes sense. I have a quick follow-up. You mentioned the vessels that are over 20 years old having 50% productivity. Is that an assumption you're making for the future, or is that something you're currently observing? Also, is there anything similar for vessels over 15 years old?

Svein Moxnes Harfjeld, CEO

For the ships over 20, as we mentioned, over 90% of those ships are in the shadow trade, and this is what we see now. This is happening because many of these ships are not fit to go into many of the load and discharge ports that are being used. So there's a lot of transshipment from smaller and into smaller ships. And this all takes a lot of time. It's very inefficient. So that fleet, sort of, very quickly is not as productive as its nominal capacity would suggest. When it comes to ships between 15 and 20, the utilization is the same as for younger ships. We have four ships in this category, and there is no difference in utilization and productivity. The only thing is, from time to time, the freight rate that you are offered for a ship that is between 15 and 20, is then mostly at the marginal discount to what a more modern ship would achieve. But there's no change in the productivity or efficiency.

Benjamin Nolan, Analyst

Yes, actually, I wanted to follow-up on the question about the options that Omar was talking about. I was just curious how long you have those options or assuming that they're still outstanding. Just trying to think about sort of the possibilities as if would it be possible to maybe flip those, should they get becoming the money and you can place the order and then resell it at a higher price? Or is there any way to potentially monetize that? Or is the option duration just not probably long enough?

Svein Moxnes Harfjeld, CEO

No, we did not communicate the timeline of those options, so they had various declaration times and sort of a staggered schedule. So we will leave it at that. I think the options would be in the money today, if you say that. I think realistically, to sort of resell those contracts or berths, you would have to declare them and make them a firm contract for that to really be realistically possible. So it's hard to sort of sell that paper and think you can sort of get a few million in between. So I think that's not an unrealistic case. And if we were to sort of pursue that avenue, it meant we had to commit to the contract first, right? And as I mentioned, we have other priorities if we are going to invest an additional money now going forward than to add newbuildings at this point.

Benjamin Nolan, Analyst

I appreciate the information. Regarding the time-charter contracts, you noted that the charter market is quite thin, which is somewhat surprising, considering the ongoing discount between the spot market rates and the rates you mentioned. Do you anticipate that this margin will narrow, particularly as we approach the second half of the year when market conditions typically tighten? Additionally, what are your thoughts on positioning your fleet in terms of spot versus contracted rates?

Svein Moxnes Harfjeld, CEO

I think one aspect here is that shipowners with sort of in-house operations, quality ships that are, so to say, eligible for these term businesses, they have quite solid expectations for the future. So the bid-ask spread is quite wide. There is currently one project in the market where an oil company is looking for a three-year charter for one or more ships. All the bids came in at average, let's call it around 60, we believe, although we don't have the details. But we believe so asking prices. And I think a project like that might clear in the sort of mid-50s. That's where the market probably is. So let's see if this project will happen. So I think it's a result of bid-ask, but I think eventually there will be more end users coming to the market to try to secure tonnage, because as this market evolves, it will be attractive for them to secure ships for three years, also five years I would think so, but it's a bit early in the upcycle for that to truly evolve.

Benjamin Nolan, Analyst

And how are you considering your desired positioning in terms of the percentage of your fleet?

Svein Moxnes Harfjeld, CEO

So as we stated before, we have a clear ambition of building more fixed income for the company, but we prefer that fixed income to be of longer-term nature. So we are not entertaining, say, inquiries for one-year charters or two-year charters. And we also, of course, looking for the right money for the right ship, so there are finer details there for us to do things. But our customer base involves customers that typically will look for term charters. So assuming that we are right in this market evolving, then you should expect us to work hard to try to put some of that to bet.

Petter Haugen, Analyst

A quick question from me on prices here. So in the newbuilding markets, We've been told that there are discrepancies between geographies, obviously. But could you please, Svein, help us quantify what it would actually mean now if you were to not with options, but coming fresh to the yard ask for a VLCC? And also then what timing of deliveries should we expect?

Svein Moxnes Harfjeld, CEO

In Korea, the shipyards are requesting over $130 million for delivery in 2027, and these ships will be designed for 300,000 tons, which is smaller than the ones we have ordered. The quoted price does not include the scrubber, and this is all subject to negotiation. To make a deal happen, it would likely need to start at $130 million. In China, the top three shipyards are currently asking around $123 million for 2027 delivery, also for smaller ships, and similar to Korea, the asking price typically excludes the scrubber. Negotiations will be key in this case as well. Additionally, some leading Chinese yards are facing space limitations for 2027, resulting in a tighter backlog compared to at least one of the Korean yards, while the other two Korean yards seem satisfied with their backlog and are not particularly eager to entertain new inquiries.

Petter Haugen, Analyst

Okay. That's very helpful. And just as a quick follow-up, in the gray fleets or black fleets, if you will, what sort of TCE equivalents would you retrieve if you were to do illicit trading business?

Svein Moxnes Harfjeld, CEO

We're not getting involved in that at all. We're not even considering it. However, we do hear some information about it occasionally. Some of the lump-sum freight payments being made are approximately double what is typical in compliant markets. It also depends on how long it takes to deliver the cargo. Additionally, the capital invested in those ships is quite different from what the larger public companies and leading rigs are operating with. The returns appear to be quite attractive, which explains why they're pursuing it. Well, thank you very much to everyone who's been on the call and listening to us, and thank you for staying tuned to DHT, wishing all a good day ahead. Bye-bye.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers please standby.